Will firms be caught out by new sunset rules?

trousers downAs the sun finally sets on workplace scheme commission, John Lappin hears predictions that some pensions advisory firms will be left with their trousers down

The final curtain will fall on commission in the workplace pensions market in April. A move that once would have been deemed a major shock to the market looks set to be much less disruptive, arguably because it has had such a long gestation period. But there could still be a sting in the tail for some advisers.

An Office of Fair Trading report published in September 2013 made clear that all types of adviser remuneration not paid directly by the employer should be removed from workplace schemes. Meanwhile, at least some of the impetus for the Retail Distribution Review arose from concerns about switches occurring in the GPP market when clawback periods ended.

The upshot is that, progressively, remuneration not paid directly by the employer has been stripped from the pension market. From the start of 2013 commission on new pension schemes was banned; from autumn 2013 consultancy charging was stopped on new schemes; and from April 2015 consultancy charging on all auto-enrolment schemes ceased. Now finally, commission is to be removed from all qualifying schemes from April 2016.

Missing details

Despite the fact that the sunset rules will happen, important details have still to be confirmed, such as how the ban will be enforced. Most experts believe a DWP consultation, yet to be published, will put the burden of enforcement on pension providers, not trustees.

Standard Life head of pensions strategy Jamie Jenkins says: “This has been many years in the making with the RDR, allied with AE. There is a general and widespread acceptance that commission doesn’t have a place in workplace pensions where people are being automatically placed into the product. It may be more appropriate to adviser charge for retirement advice, but that is very different from upfront commission where people are auto-enrolled.

“The existence of commission is very limited, certainly on qualifying schemes, and most of it has been run off in the first round of the commission ban and then the charge cap. It is very limited on occupational schemes with master trusts or existing trusts. With other big changes due in April, it feels like a relatively benign change.”

Aviva technical reform manager Dale Critchley says: “We are seeing commission being removed at the eleventh hour. Some advisers and employers want to use commission to reduce employer fees right up until April. Once we get to April, we have that level playing field between IFAs and EBCs.

“We will see IFAs move to the fee-based market, and some EBCs move into what was the commission market to compete on a flat-fee basis. There will be IFA advisers who have agreed to pay fees and will want to protect clients from being poached by other advisers. So we expect that to drive down fees.

“We think advisers will look to renegotiate charges, and they will be seeking the best services. Providers will not be able to hold on to a scheme by paying big commissions. They will have to offer good service to employers and advisers. There will be a cost to advisers and employers in moving a scheme, so that may act as a brake. However, employers and advisers may take a short-term hit on cost to get a long-term benefit. It can only be good for employers and employees.”

“We will also see advisers looking to diversify. Advisers who have had a guaranteed income from commission may move to set up master trusts and move into that AE space. But the advantage they have over EBCs is that they have an individual advice capability and there are lots of opportunities as senior people need help with tax planning.”

‘Braced for change’

Most corporate advisers say publicly that the fact that the final ban has been so long in coming means the market is more than braced for the change, although some may be caught out.

Capita Insurance and Benefits divisional head of marketing and research Robin Hames says: “This undoubtedly will be a watershed in the corporate advice market. To borrow from Warren Buffett, the tide of commission is finally going out and we’re going to see who was swimming without trunks.

“In truth, firms have known this day was coming for quite some time. The death knell of commission was sounding long before government and regulatory intervention. The number of commission-paying providers dwindled and it was clear that its shelf life was limited.

“We began the process of moving away from commissions several years ago – providing clients with a menu of services and their associated initial and ongoing costs. Where the employer preferred commission to fees, we aligned the provider payments to reflect this as closely as possible. For these clients, we have also taken them on a journey to prepare them for the transition to fees. It hasn’t been perfect or without challenges along the way but we feel the direction of travel has been appropriate.”

Lift Financial head of corporate pensions Noel Birchall says: “We have known commission was going for some time. The big exposures for firms would have been anyone that was taking big front-end commissions for joiners on new schemes. Our business was, for the most part, already on fees, with a few schemes on level commission.

He adds: “With the cases on level commission, we had a fairly defined fee service basis that equated to what we were getting on the level commission, broadly speaking if not pound for pound.

“We had already said to clients: ‘We are doing this, this and this for the commission. At the moment, we are being paid by level commission that pays every year, so there is no need for offset. But this will run out and, when it does, you will have to start paying us fees.’ That has not been a problem.”

But Birchall says the changes mean that Lift has been able to take over some larger schemes that have been tilted strongly towards commissions in the past.

“We have had a few quite large cases that we have taken over and we switched off the commission early. We said we have to go to fees anyway so we will go straight to fees where there were big commissions being paid and then negotiated on the AMC. The members got the benefit of a big discount in the AMC along with the end of active member discounts, and then we did a nice bit of communication on that.”

Hargreaves Lansdown head of pensions research Tom McPhail says: “To a large extent the boat has already sailed on this. The providers have been turning off their commission payments, so businesses have had to adapt to a fee-charging model. In some cases they are making it work but in others they think they are making it work but may find out in the fullness of time that it isn’t working for them. We saw this post-RDR, like a cartoon character who runs off a cliff and realises only when they look down.”

PTL managing director Richard Butcher says: “The market has been fairly polarised between commission and non-commission payers. Some provider firms have said they would turn it off or restrict it. But some firms have argued that advisers are entitled to take the money because they perform a social function and do a job of work.

“That position largely remains current. There are those that won’t pay it and those that say: ‘Well, we will continue to do this while we can.’ If there is any leeway in the definitions, I dare say some will assertively look for that and seek to use it.

“A lot of employers are saying: ‘As long as we can use commission for our arrangements, we would like to continue until we have to pay fees.”

‘Fork in the road’

The Lang Cat founder Mark Polson expects some movement in the market as advisers review schemes. He says: “There is a fork in the road. On the one hand, you may have some employers saying ‘I will put my hand in my pocket and pay for you to look after this.’

“I would expect movement and disturbance of the backbook as advisers take this as a review point. That is good business sense. Some may call it churn; I think it is a natural point. Yet you may also see a lot of orphan schemes not using advisers. Employers are used to having people look after them. A provider might not be able to deal with a wave of them. They can help employers but not all at once. This could chuck another load of fuel on the fire. It is as big a deal as sunset on retail business but with lots of people potentially having to be dealt with all at once.”

Advisers also have concerns about disintermediation. Jelf Employee Benefits head of benefits Steve Herbert says: “My biggest concern is that some employers will opt to deal direct with providers but won’t ask the right questions or appreciate the difference in services provided in the switch from intermediary to provider. This could lead to some major mistakes by employers down the line, which is of course bad for both employer and employee but equally not good for the wider image of pension savings.

“Despite auto-enrolment, we still have a major savings problem in the UK – and one that could perhaps be worsened by pension freedoms. I think the ‘bad news’ will come a little way down the road once the commission tap is turned off and the mistakes have become known.”

Hames echoes Herbert’s and Polson’s concerns about such ‘orphan’ schemes. He says: “If advisory firms have been unwilling or unable to wean themselves off commission – especially substantial initial commissions – their business models may well have been based on unsustainable ‘super’ profits. The fear must be that clients may find themselves expected to effectively pay twice for their servicing. If they are not prepared to do so, they may end up orphaned at the provider’s door. This could be an unedifying outcome and might be seen as a vindication of critics who have argued that not all advisory business models were aligned to their clients’ needs.”

McPhail also suggests the dyn-amics of employer/adviser/provider relationships could change. He says: “There are a lot of unpredictable factors at work.

“We are seeing a lot of retirement events being done with the provider. That could prompt some provider marketing managers to take a more relaxed
view of the relationship between the scheme members and those they provide a service for.”

In terms of the impact on employers, McPhail says: “We also have experience of employers taking a while to work out if this relationship is working for them and then coming back out into the market to ask about the provider and the adviser. They might decide to go to Nest but that takes a year or so to work its way through a workplace.”

Butcher adds: “There is a risk to ending commission payments. Between 1998 and now, IFAs have extended the coverage of workplace pensions into markets where they didn’t have any coverage There are a lot of people who might not have had a pension at all if it hadn’t been for the IFA. We should be careful not to vilify all advisers but we should be aware that some advisers have abused the system, although they have not been the norm.

“From a given date, commission will have to stop. What impact will that have on coverage, or on the quality of the benefit?”

IN FOCUS: cat among the pigeons

Could there be a return to commission just as it is finally removed from the market?
FCA interim chief executive Tracey McDermott has put, at the very least, a well-fed kitten among the pigeons on that one.

Speaking on Radio Four’s Money Box programme, she said: “We do not want to go back to a world where we had the problems of pre-RDR. What we do want to look at is the best way of delivering advice and guidance across the market, so I wouldn’t rule out that there may be some element of commission. But we are not going to reverse the RDR.”

Mark Polson says: “I think Tracey will be looking closely at responses to what she said on Money Box. I don’t think any of it was by accident; it was a clue to what may happen in FAMR. I would treat it as a trail balloon.

“If it was the case that some form of commission could be brought back, there is no reason why that shouldn’t be useful for workplace schemes. If we wanted a concept of focused advice in broadly non-toxic issues, it sounds like workplace pensions.

“One thing we would love from FAMR is employers being able to say ‘Joining this is a good thing’ and not worrying about that being deemed advice.

“But specifically on commission, some may say: ‘Fantastic! I could earn a decent amount on small pots.’ But the market broke on commission. Even if commission went back to being part of our world, there’d have to be some sort of arithmetical link with the value of the business.”

Standard Life’s Jamie Jenkins is more circumspect, saying in relation to McDermott that one should not read much into remarks made by someone who had been backed into a corner. He says commission still exists in parts of the market but he does not believe McDermott’s comments suggest any sort of across-the-board reversal.

Lansons public affairs expert Ralph Jackson says: “We need to check that what was said was meant and what was meant was said. You can’t believe that the same regulator that went through the whole process of RDR is now saying it is going to be unwritten because of FAMR, because if that is the case then people have been misled as to the remit of FAMR and, to some extent, Mifid.

“It is also hard to believe that the Treasury select committee that went through this would think it was a good way for the public to engage with the financial services industry. I can’t believe that is a joined-up exercise. You’d think there would be a coherent exercise from the Treasury to prepare the market if it was the case.

“And is it even a sensible thing? That has still to be answered.”